Nwe York, New York
January 15, 2009
Rising production costs including
fertilizers, seeds, chemicals, fuel, land and equipment as well
as higher labor and capital expenditures will pressure
agriculture producers’ bottom lines in 2009, according to
Rabobank’s recently
published “North American Food & Agribusiness Outlook.”
“With increases ranging from 28 percent to 40 percent, it is
quite obvious why input costs have become a major factor when
farmers are determining what to grow each year,” said Rabobank
Food & Agribusiness Research and Advisory (FAR) Associate Erin
FitzPatrick. “Fortunately farmers faced with these higher input
costs have access to a growing number of resources to help in
decision making and efficiency measures.”
For example, global positioning systems, yield monitors and
advanced irrigation systems are consolidating information and
analyzing returns across the farm. Additionally, by
incorporating historical information at the individual farm
level, producers can plan their 2009 crop year field by field.
“The profitability of each decision is really only one click
away,” said FitzPatrick, who wrote the Outlook’s chapter “U.S.
Crop Inputs: Implications of Changing Demand.”
While technology helps mitigate risks and farmers more
efficiently use crop inputs, “many producers are looking at the
reality of a potential margin squeeze in 2009 because of higher
production costs and volatile grain prices,” said FitzPatrick.
Fertilizers
“The greatest crop input price appreciation in 2008 was
fertilizers. However, the historically cyclical industry is
seeing prices will fall from the high levels of 2008,” said
FitzPatrick. Specifically, nitrogen and phosphate fertilizer
prices will soften more than potash. Even with this reduction,
some farmers will reduce or eliminate traditional fertilizer
application rates. Additionally, this weaker demand, and a
tighter money supply has resulted in reduced production by
fertilizer companies.
Seeds and Chemicals
Unlike fertilizers, seeds and chemicals offer a wide range of
options and are continuously changing. Agrochemical companies
recognize that seed choice is one of the first and more
important decisions farmers make each season, and therefore have
a disproportionate amount of research and development dollars
allocated to developing new varieties. This allows major
agrochemical companies to create a strong flow of new products
to the markets. “Biotechnology continues to be the quickest
adapted advancement in the U.S. agriculture industry from
improving farm profitability,” said FitzPatrick.
Fuel
Rising fuel prices affect farmers’ diesel expenses, but also
have numerous indirect effects in terms of transportation, raw
materials, and marketing costs. With crude prices essentially
doubling in the first half of 2008, farmers were directly
exposed to the increase through their diesel purchases. And,
while “the price of crude oil came down significantly in the
second half of 2008, what future prices will be is a topic that
is hotly debated and anyone’s guess,” said FitzPatrick.
Land
Farm real estate values have risen for the past 20 years, but
the most sizable appreciation between 2004 and 2008. This has
improved land owners’ balance sheets; however, expanding
operations by buying more land is much more costly.
Additionally, cash rents have not kept pace with land values.
“This divergence points toward stagnating growth in land
values,” said FitzPatrick.
Equipment
The real bright spot for agriculture equipment companies has
been in emerging markets. A weak U.S. dollar and earlier stages
of consolidation have driven profits for equipment sales in
China, India, Brazil and Russia. This trend has resulted in more
manufacturing plants being established closer to these
consumers. As a result, the U.S. farmer has a relatively smaller
impact on the overall profitability of agriculture equipment
manufacturers. “U.S. farmers faced with these higher prices and
a year of lower profit will likely slow their enthusiasm for new
equipment purchases in 2009,” said FitzPatrick. Additionally,
credit availability in countries like Brazil has hindered demand
growth for big ticket items such as agriculture equipment.
The premier bank to the global food and agriculture industry,
Rabobank is a global financial services leader providing
institutional and retail banking and agricultural finance
solutions in key markets around the world. From its century-old
roots in the Netherlands, Rabobank has grown into one of the 25
largest banks worldwide, with over $800 billion in total assets
and operations in over 35 countries. Rabobank is the only
private bank in the world with a triple A credit rating from
both Standard & Poor’s and Moody’s, and is ranked among the
world’s safest banks. In the Americas, Rabobank
(www.RabobankAmerica.com) is a leading financial partner to the
entire American food and agribusiness industry and is a
specialist in sophisticated, customer-driven solutions in the
Global Financial Markets and Corporate Finance arenas. Rabobank
also provides retail and commercial banking services in
California; leasing; and real estate lending. |
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